Rental Affordability Is Only Going To Get Worse

Editor's note: Below is an interview with Jed Kolko, chief
economist at Trulia. This Q&A went out to
subscribers of our "10 Things You Need To Know Before The Opening
Bell" newsletter on Monday morning. Sign
up here to get the newsletter and more of these
interviews in your inbox every day.

BUSINESS INSIDER:The
concern among many analysts has now shifted to sky-high rents. Do
you share this concern?

JED KOLKO: Yes. Rental affordability is
worsening. Rents are rising faster than incomes, so the typical
household is getting squeezed. Unlike buying, renting did not get
significantly more affordable during the housing bust and
recession. The drop in home prices and historically low mortgage
rates made home buying more affordable after the bubble burst –
at least for people who could make the down payment and qualify
for a mortgage, though buying was and remains out of reach for
many. Rents, however, rose throughout the recession or fell only
modestly, depending on the measure you look at, even though
incomes stagnated, and of course low mortgage rates don’t help
renters.

The recession caused rental demand to rise. Millions of people
lost homes to foreclosure, and many of them became renters; in
addition, many others put off their first-time home purchase and
remained renters.

Rental supply has increased in response to strong rental demand,
in a couple of ways. First, investors purchased single-family
homes – including foreclosed homes – and rented them out. Second,
apartment construction is booming, reaching a 15-year high in
2013. Our latest Rent Monitor, from March 2014, shows
rents rose year-over-year 4.4% for apartments and 1.9% for
single-family homes. Without this investor and construction
activity, rents would have risen even more.

BI: Where it is a problem, what polices can be effected
to address the issue?

JK: The single best policy to improve
rental affordability is to increase supply. The markets with the
highest rents, like San Francisco and New York, tend to be
difficult cities to build in: tight supply plus strong demand
equals high rents. Zoning and other local regulations, as well as
programs for financing affordable housing construction, all
affect the ease and cost of building more units.

Policies like rent control preserve affordability for current
renters who are covered by the regulations but do little to
affect rental affordability in the long run and could even worsen
affordability if they end up discouraging new construction (the
impact of rent control on new construction depends on the details
of rent regulations and which units are
covered).

BI: What will be the longer term consequences if
the issue persists?

JK: If rents continue to rise relative to
incomes, and supply does not keep up with demand, we should
expect to see some mix of the following things:

(1) some people will spend a higher fraction of their income on
rent and reduce spending on other things including saving;

(2) some people will consume less housing by choosing smaller
units, cheaper neighborhoods, or living with others;

(3) some people will buy instead of rent if buying becomes more
affordable relative to renting.

However, even though rents are rising faster than incomes, home
prices are rising faster than rents; furthermore, mortgage rates
are rising, too. When prices outpace rents, and mortgage rates
rise, the advantage of buying over renting shrinks. Recently, we
calculated that it was 38% cheaper to buy than to rent,
nationally, but a year ago the gap was wider, at 44%.

BI: What is the most under-reported story in
housing?

JK: There are actually still
a lot of vacant homes out there. Even
though the inventory of homes actually listed for sale is below
long-term norms, the share of vacant homes is still higher than
pre-bubble levels, including in many markets that have
traditionally been fast-growing. The elevated vacancy rate holds
back construction activity because builders don’t want to build
where there are already a lot of vacant homes. The main sources
of housing data don’t tell us for sure why there are a lot of
vacant homes being held off the market (i.e. neither for sale nor
for rent).

BI: How do you think Fannie Freddie reform will resolve
itself?

JK: There seems to be bipartisan support
for Fannie and Freddie reform, but lots of issues -- both
practical and philosophical – stand in the way. Ultimately,
housing finance reform means finding the right balance between
(1) keeping mortgages – including the 30-year fixed-rate mortgage
– affordable and available, and (2) minimizing the cost to
taxpayers of another housing crisis. Even if there’s quick
agreement on what the future housing finance system should look
like – which is very unlikely – the path will take many years.
Other policy changes, like Fed tapering and the new mortgage
rules, will have a more immediate impact on the cost and
availability of mortgages than Fannie and Freddie reform.